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OEMs: Latin America Forecast For Crossover Jets Beatable

Aviation Week & Space Technology

Bernie Baldwin

Dec 07, 2017

Whenever market forecasts appear, Latin America is usually one of the regions with the lowest expected sales over the period being studied. Within the region, large countries such as Mexico, Brazil, Colombia and Chile all have populations who share a low propensity to fly—fewer than 1%—according to the International Air Transport Association’s Tourism Economics Air Passenger Forecasts of September 2016.

In the crossover narrowbody jet market, Embraer’s 2017-36 forecast predicts 620 aircraft will be needed in the 90-130-seat segment. Given the better performance of the Embraer 190/195-E2 aircraft though, plus the potential for more rightsizing, the OEM is aiming to surpass those figures. But first, the company is shifting its forecast parameters—and for good reason.

“With the E195-E2, which will seat up to 146 in a high-density configuration layout, Embraer is reviewing its market outlook and is now considering the market of jets up to 150-seats,” explains Arjan Meijer, chief commercial officer of Embraer Commercial Aviation. “With this in mind, Embraer projects that Latin America will demand 1,120 aircraft in the 70-150-seat segment, which is 11% of the total global demand in this segment [10,550 units]. When you consider only the jet segment, we have more than 70% market share in Latin America [accumulated net orders], with about 220 aircraft in operation. Our expectation is to maintain this leadership with the E2s,” he says.

Bombardier’s 2017-36 forecast, which covers aircraft of 60-150 seats, predicts a need for 1,050 aircraft over 20 years. Alex Glock, Bombardier Commercial Aircraft’s vice president of sales for Latin America and the Caribbean, also believes his product has the potential to exceed the forecast numbers, particularly after the recent deal with Airbus.

“The C Series is well-positioned to succeed in Latin America,” Glock declares. “The partnership with Airbus is increasing our market opportunities. Our C Series aircraft will certainly benefit from Airbus’ footprint in the region. In addition, smaller regional aircraft will need to be substituted by larger and technologically advanced aircraft like the C Series.”

United Aircraft Co. (UAC), parent company of Sukhoi Civil Aircraft Co., forecasts sales of 340 aircraft, with a value of $21.3 billion, in the 61-120-seat segment in 2017-36. The UAC figure obviously covers the capacity ranges of its current Sukhoi Superjet 100 as well as a 120-seat stretched version of the aircraft said to be under consideration, but does not cover models such as the E195-E2 or the Bombardier CS300. UAC puts the current fleet in its target segment at 374 aircraft with 59 orders.

Mark Hughes, executive vice president of corporate finance for lessor Falko Regional Aircraft Ltd.—which has 28 E-Jets in its portfolio and signed letters of intent for up to 24 Bombardier CS100s—has been observing the market. “So far, the firm orders have been driven by a variety of requirements, from replacing smaller, older aircraft through to new growth capacity in that aircraft size. If airlines turn to crossover narrowbody jets as credible replacements for aging Boeing 737-700 and Airbus A319 aircraft, the potential could be much bigger,” he explains. “There are more than 800 737-700/A319s over 15 years old, which creates a huge potential replacement opportunity.”

Brazil and Mexico seem the likeliest markets for crossover jets, but Glock believes other market forces are at work. “Throughout Latin America, there is a great amount of consolidation, and I believe this trend is not bounded by countries,” he states, likely referencing the cross-border airline groupings of LATAM and Avianca. “It’s a trend that we will see throughout the region.”

Meijer highlights underserved markets as the place where opportunities lie. “There are several regional routes with low-frequency service due to oversized-aircraft capacity allocation,” he asserts. “However, based only on projected GDP growth, we believe that, after Mexico and Brazil, the markets in Colombia, Argentina, Chile and Peru will present very good opportunities for 100-seat aircraft.

“Regarding E-Jets placements, we are seeing opportunities for rightsizing of low load-factor narrowbody flights, new markets through lower risk and flexibility, natural evolution for existing 50-seat markets and also replacement of old and inefficient jets,” adds Meijer.

“These aircraft could create niche markets serving long thin routes,” posits Hughes. “The C Series has huge range for its size and we’re already seeing AirBaltic fly Riga [Latvia]–Abu Dhabi routes with a CS300. Development in other markets could be limited by pilot scope clause agreements and where these aircraft sit between regional and mainline operations,” he explains.

Financing of these new aircraft in Latin America may be a challenge, but Hughes is relatively optimistic. “Many of the larger Latin American carriers have looked to use export credit agencies financing for new aircraft. Both Export Development Canada and [Brazilian export bank] BNDES are likely to be very supportive of these new aircraft, so we would expect many initial deliveries to be financed in this way. There may be some scope for operating lessors further down the line,” he remarks.

Glock predicts that may happen sooner, pointing out that over 65% of Latin American airlines count on operating leases. “As the region consolidates, we will see a more and more balanced approach of financing alternatives with airlines having much more diversified portfolios,” he says.

Similar to Hughes, Meijer expects some part for credit agencies despite “the shutdown of the U.S. Ex-Im Bank and European export credit agencies and the overall liquidity in the market.” He admits that “export credit agency participation of financing has reduced in Latin America, but for aircraft in our segment they still play a role. Capital markets in the region are not very active, as they still need to be developed. The two main funding sources remain leasing companies and banks.

“Brazil has been the main driver for the airline market in Latin America,” Meijer continues. “Although airline capacity has stalled for the last five years, a slow recovery is expected throughout the region.”

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